Caution: Do Not Cross! Capital Buffers and Lending in COVID-19 Times

How to Release Capital Requirements During a Pandemic? Evidence from Euro Area Banks

“…This result is in line with the analysis of Couaillier et al (2022) which finds that, although prudential authorities made clear at the beginning of the pandemic that banks were expected to use regulatory capital buffers to absorb losses and meet credit demand, banks did not show any intention to use such buffers. Nonetheless, the releases -by lowering regulatory capital requirements -enhanced the amount of capital available which is relatively more important for banks with limited management buffer, thus mitigating possible credit contractions coming from banks with little excess capital on top of the P2G.…”

“…As explained in Section 1, banks with limited excess capital may struggle to increase their lending supply during periods of financial distress as a breach of the CBR may trigger a series of restrictions in terms of dividend distributions, bonuses and coupon payments as well as negative repercussions like market stigma effects -which may lead to higher funding costs -and heightened supervisory scrutiny (Couaillier et al 2022), while in normal times breaching the P2G can trigger discretionary actions from the supervisor. Consequently, we hypothesize that, ceteris paribus, the benefits from capital requirement relief should be higher for those banks which entered the crisis with limited management buffers.…”

“…We rely on granular loan-level data, using confidential bank supervisory data and the credit register of the European System of Central Banks (AnaCredit) to overcome identification challenges (as in Altavilla et al 2021;Couaillier et al 2022). We employ loan-level data to control for credit demand effects using firms with multiple bank relationships and introducing firm-time fixed effects (Khwaja and Mian, 2008).…”

Informing Macroprudential Policy Choices Using Credit Supply and Demand Decompositions

“…Using a large-scale semi-structural model, the results are also confirmed in (Budnik et al, 2021). In line with Couaillier et al (2021a), who focus on the differential lending response of banks with different capital headrooms, we use AnaCredit data and exploit its unique granularity. Differently from these authors, we first disentangle demand from supply and then test the effect of the policies.…”

Análisis de la capacidad de uso de los colchones de capital durante la crisis generada por el COVID-19

“…Esta reducción ha sido más intensa para pymes dependientes de los bancos para su financiación, especialmente aquellas cuyas relaciones con los bancos eran más recientes. Couaillier et al (2022) han encontrado resultados similares para el conjunto de la zona del euro.…”